The Seven Deadly Taxpayer Sins

Wrath. Greed. Sloth. Pride. Lust. Envy. Gluttony. Who among us hasn’t fallen victim to temptation? After all, no one is perfect. Of course, there’s a moral penalty to pay. But when you exhibit one of these vices in the tax arena, you also have to answer to another higher authority…the IRS. As these real-life battles with the IRS illustrate, the results of these seven sins generally are not favorable, to say the least. Take a look.

Images are from Hieronymus Bosch's "The Seven Deadly Sins and the Four Last Things."

After a job transfer, a worker relocated his family to a new state. But his wife didn’t like living there and returned to their old home with the kids. When he visited over a holiday weekend, he discovered another man had been living there with his wife. When his wife left the house after a quarrel, he piled some of her clothes on the stove and set them on fire. The fire spread and burned down the house. At tax time, he claimed he was entitled to a casualty loss deduction. But the Tax Court said no, reasoning that allowing him to deduct a loss from a fire he deliberately set would be a bad policy.

There’s a saying that while pigs get fat, hogs get slaughtered. A taxpayer who tried to hide a $15 million stock sale from IRS found out that the adage was true. The tax man uncovered the hidden sale on audit, and the seller refused to provide any information on what he paid for the shares. A federal court ruled that his tax basis in the stock was zero, meaning he had to pay capital gains tax on the entire proceeds. So as a result of his greed, and his foolish refusal to substantiate his tax basis, the total of the extra taxes, penalties and interest he owed came to $7.5 million.

A busy tax preparer ran her business out of her home. During tax season, she tired of after-hours phone calls from clients and occasionally booked a room at a local hotel to duck their calls. On her own return, she deducted the cost of her rest and relaxation as a business expense. Unfortunately for her, the Tax Court ruled that the cost of her escape from clients was a nondeductible personal expense.

A husband foolishly began chatting up a revenue agent who had begun an examination of his return. His bragging alerted the auditor to a home sale that occurred in the year prior to the one under audit. The agent ended up expanding the audit to include the previous year, and found that the sale didn’t qualify for the break that makes most home sale profits tax-free. So as a result of the taxpayer’s loose lips, he had to fork over more than $150,000 in tax, penalty and interest.

A tax lawyer spent more than $65,000 in a year on prostitutes and pornographic materials. He deducted the total as a medical expense, making a novel argument about the positive health effects of sex therapy. However, the Tax Court red-lighted his write-off, saying that his conduct not only was illegal, but also wasn’t for the treatment of a medical condition.

Coveting thy neighbor’s wife isn’t a good idea, and it can have tax consequences, as this case shows. After a police officer discovered his wife was having an affair with her doctor, he confronted the physician and threatened a lawsuit. The doctor agreed to pay $25,000 to cover his indiscretions. The police officer claimed the $25,000 was a tax-free gift, but the Tax Court said that the payment is taxed as income because it was offered to settle the doctor’s misconduct.

A car collector purchased a rare and expensive McLaren F1 sports car from a German seller and imported it to the U.S. He didn’t pay the gas-guzzler tax, which applies to a manufacturer’s sale or an importer’s use of an automobile with low fuel economy, or a luxury tax on cars that was in effect at the time. IRS sniffed out the import transaction and sent a bill for more than $75,000 in taxes, penalties and interest. The car owner tried to put on the brakes, but a federal court sided with the IRS.